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Emerald Aero, LLC v. Kaplan

California Court of Appeals, Fourth District, First Division

February 28, 2017

EMERALD AERO, LLC, Plaintiffs and Respondents,
STEPHEN KAPLAN, Defendant and Appellant.

          Order Filed Date 3/21/17 (unmodified version)

         APPEAL from a judgment of the Superior Court of San Diego County Super. Ct. No. 37-2012-00057479- CU-BC-NC, Jacqueline M. Stern, Judge. Reversed with directions.

          Smaha Law Group, John L. Smaha, Kristen Marquis Fritz, and John Paul Teague, for Defendant and Appellant.

          Horwitz Armstrong, John R. Armstrong and Matthew S. Henderson, for Plaintiffs and Respondents.


         THE COURT

         The petition for rehearing is DENIED.

         It is ordered that the opinion filed on February 28, 2017 be modified to add the following paragraphs beginning on page 25, immediately before the Conclusion:

         Lastly, we consider plaintiffs' contention that Kaplan waived his right to appeal the judgment confirming the arbitration award. Plaintiffs rely on the portion of the parties' arbitration agreement stating the parties are "GIVING UP ANY RIGHTS [THEY] MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY EXECUTING THIS AGREEMENT, EACH PARTY HERETO IS GIVING UP ITS OR HIS JUDICIAL RIGHTS TO DISCOVERY AND APPEAL."

         California courts enforce contractual provisions waiving a party's right to appeal a judgment on an arbitration award. (See Guseinov v. Burns (2006) 145 Cal.App.4th 944, 952 (Guseinov); Pratt v. Gursey, Schneider & Co. (2000) 80 Cal.App.4th 1105, 1108-1109 (Pratt).) But they do so only if this intent is "clear and explicit." (Ruiz v. California State Automobile Assn. Inter-Insurance Bureau (2013) 222 Cal.App.4th 596, 604; accord, Guseinov, at p. 952 ["waiver should be clear and express"].)

         Reasonably read, the cited language of the parties' arbitration agreement does not show Kaplan waived his right to appeal on the limited judicial review grounds provided in the arbitration statutes. "[G]enerally, a contract provision stating that arbitration is 'non-appealable' signifies that the parties to the contract may not appeal the merits of the arbitration; not that the parties agree to waive a right to appeal the... judgment confirming or vacating the arbitration decision." (Southco, Inc. v. Reell Precision Mfg. Corp. (3d Cir. 2009)331 Fed.Appx. 925, 927, italics omitted.) This principle applies here. Although the parties unambiguously gave up their rights to litigate the matter in a judicial forum, including their judicial appellate rights, they did not explicitly waive their rights to the limited judicial review provided under the arbitration statutes, which encompass the right to appeal a final judgment on these matters. (See § 1294.) The waiver of "judicial rights to discovery and appeal" is not sufficiently specific to waive the right to challenge a judgment confirming an arbitration award. (Capitalization omitted and italics added;see Guseinov, supra, 145 Cal.App.4th at pp. 952-955 [no explicit waiver of appellate rights to challenge judgment on arbitration award where parties agreed only to " 'waive any right to appeal the arbitral award' "]; Reisman v. Shahverdian (1984) 153 Cal.App.3d 1074, 1082, 1088-1089 (Reisman) [no waiver of appellate rights to challenge judgment confirming arbitration award under agreement that " 'once the arbitrators have rendered an award, no appeal or further proceeding will be possible' "].)

         In the arbitration clause, the parties expressly agreed to "have any dispute... decided by neutral arbitration as provided under applicable law."(Capitalization omitted; italics added.) Applicable law provides for limited judicial review of arbitration awards through the statutory confirmation/vacation procedures, and for the right to appeal the ensuing judgment. (§§ 1285-1287.2, 1294.) By agreeing to arbitrate their dispute under California law without explicitly waiving their rights under this law, the parties manifested their understanding that they had retained their appellate rights to challenge the final judgment. (See Guseinov, supra, 145 Cal.App.4th at pp. 954-955.)

         Plaintiffs' reliance on Pratt, supra, 80 Cal.App.4th 1105is misplaced. In Pratt, the parties stipulated "the right to appeal from the arbitrator's award or any judgment thereby entered or any order made is expressly waived." (Id. at p. 1107, italics added.) The Court of Appeal found this language "constituted an express waiver of the right to secure appellate review" (id. at p. 1108) because the contractual provisions "involve[d] specific waiver of the right to appeal 'any judgment' or 'any order' " (id. at p. 1111, italics added). This type of explicit language was missing here. As have other California courts, we decline to find a forfeiture without the parties' express manifestation of intent to waive their appellate rights to challenge a judgment on an arbitration award. (See Guseinov, supra, 145 Cal.App.4th at pp. 952-955; Reisman, supra, 153 Cal.App.3d at pp. 1088-1089.)[1]

         There is no change in the judgment.

          HALLER, J.

         Stephen Kaplan appeals from a judgment confirming a $30 million arbitration award against him. Although the award does not specify the nature of the damages, the parties agree a substantial portion of the award consists of punitive damages. The arbitrator issued the award after a hearing which Kaplan elected not to attend. We conclude the judgment must be reversed. The arbitrator exceeded his authority by awarding punitive damages without adequate prior notice to Kaplan, in violation of the parties' arbitration agreement and fundamental procedural fairness principles.


         This matter arose when several investors (plaintiffs[2]) sued Kaplan and a limited liability company (referred to as Houston LLC[3]) alleging defendants breached fiduciary duties pertaining to plaintiffs' investment in a self-storage facility located in Texas. Plaintiffs sought compensatory damages and declaratory relief, but did not seek punitive damages. After the court granted defendants' unopposed motion to compel the matter to private arbitration, the arbitration hearing was stayed while Kaplan was criminally prosecuted for his conduct in soliciting and handling investments in self-storage facilities, including the property at issue in plaintiffs' lawsuit.

         After Kaplan pled guilty to a wire fraud charge in the criminal action but before his sentencing hearing, a telephonic arbitration hearing was scheduled. The parties had about two and one-half weeks' notice of the hearing date. On the day before the hearing, plaintiffs emailed a brief substantially increasing their original arbitration damages claim and requesting punitive damages for the first time. Defendants did not appear at the hearing. After the telephonic hearing, the arbitrator awarded plaintiffs $30, 835, 152.57, without specifying the grounds or nature of the award. Kaplan then requested that the arbitrator vacate or modify the award, but the assigned arbitrator recused himself from all further arbitration proceedings and the arbitration administrator declined to reassign the case.

         In the superior court, Kaplan moved to vacate the award, and plaintiffs moved for an order confirming the award. The court denied Kaplan's motion to vacate, and entered judgment of $30, 835, 152.57 against defendants.

         In challenging the judgment on appeal, Kaplan recognizes courts have limited authority to review arbitration awards, but contends the court erred in confirming the award based on several statutory exceptions to this rule. (See Code Civ. Proc., § 1286.2, subd. (a)(1), (3), (4).)[4] We agree with one of these arguments. We determine the superior court erred in entering judgment on the award because the arbitrator "exceeded [his] powers" by issuing an award that violated applicable arbitration rules and procedural fairness principles. (§ 1286.2, subd. (a)(4).) Specifically, less than 24 hours before the arbitration hearing, plaintiffs notified Kaplan for the first time they were seeking punitive damages. Plaintiffs did so by requesting punitive damages in a late-filed arbitration brief attached to an email sent to the arbitrator and copied to Kaplan (who was not represented by counsel at the time). This notice violated the parties' arbitration agreement because it was not reasonably calculated to inform Kaplan of the punitive damages claim and precluded a fair arbitration proceeding. The notice defects were also compounded by other procedural irregularities in the arbitration process. The arbitrator acted beyond his authority.

         The applicable code section provides that when an arbitrator issues an award beyond his authority and there is no basis to correct the award without affecting the merits of the decision, the arbitration award must be vacated. (§ 1286.2, subd. (a)(4).) These circumstances occurred here. Accordingly, we reverse the judgment confirming the award against Kaplan, with directions for the superior court to enter an order vacating the arbitration award as to Kaplan and remanding the matter for a new arbitration hearing on damages.

         The second defendant, Houston LLC, did not file a notice of appeal or appear in this action, nor has any counsel appeared on its behalf. Kaplan nonetheless seeks to assert arguments on its behalf. We have no jurisdiction to consider these arguments, and thus the judgment remains as to Houston LLC, which is not a party to this appeal. (See Van Buerden Ins. Services, Inc. v. Customized Worldwide Weather Ins. Agency, Inc. (1997) 15 Cal.4th 51, 56; Caressa Camille, Inc. v. Alcoholic Beverage Control Appeals Bd. (2002) 99 Cal.App.4th 1094, 1102.)


         Because the legal issues involve procedural fairness of the arbitration proceeding and the parties disagree about the procedural facts leading to the arbitration hearing, it is necessary that we set forth those facts in some detail. We describe only the facts contained in the appellate record, viewing those facts in the light most favorable to plaintiffs.[5]

         In September 2012, plaintiffs (individually and on behalf of certain involuntary plaintiffs) sued Kaplan and Houston LLC alleging these defendants breached duties in managing a self-storage facility in which plaintiffs had invested substantial funds. Plaintiffs alleged defendants engaged in "schemes to redirect benefits intended to go to Plaintiffs and [other] investors" and obtained "unfair financial benefits." Based on these and other allegations, plaintiffs asserted causes of action for (1) breach of fiduciary duty; (2) aiding and abetting breach of fiduciary duty; and (3) quiet title. On the first two causes of action, plaintiffs sought "actual and consequential damages in excess of $10, 000, 000.00 to be proven at trial." There was no mention of punitive damages in the complaint.

         The parties' contract contained an arbitration provision requiring "binding arbitration" under American Arbitration Association (AAA) rules, in which the parties agreed to give up their rights to a "court or jury trial" and to "discovery and appeal." (Capitalization omitted.) Based on this provision, defendants filed an unopposed motion to compel arbitration. In March 2013, the superior court ordered the matter to arbitration.

         About 10 months later, in January 2014, plaintiffs submitted a request to the AAA "to have a case opened...." In the attached "CLAIM SUMMARY" form, plaintiffs identified "[$]1, 000, 000.00" as the "Claim Amount." In the "Claim Description, " plaintiffs stated: "Plaintiffs base their claim as... outlined in [their] complaint... which includes allegations of fraud, breach of fiduciary duty and aiding and abetting. For money damages Plaintiffs have reasonably incurred to clear the cloud on Plaintiffs['] title to the Property and to prevent the sale of the Property by Defendants and such other damages to be proved at arbitration. Prejudgment interest... at the applicable legal rate, for the costs of suit herein [including] attorney fees, and any and all penalty damages and ...

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